Management's Discussion and Analysis Quarter Ended ...

Builders Capital Mortgage Corp.

Management’s Discussion and Analysis Quarter Ended September 30, 2019

BUILDERS CAPITAL MORTGAGE CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS QUARTER ENDED SEPTEMBER 30, 2019

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MANAGEMENT’S DISCUSSION AND ANALYSIS

This management’s discussion and analysis (MD&A) has been prepared by Builders Capital Mortgage Corp. (Builders Capital or the company) as of November 28, 2019. It should be read in conjunction with the company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2018, available on SEDAR at www.sedar.com and on our website at www.builderscapital.ca. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). All financial information is presented in Canadian dollars.

Notice Regarding Forward‐Looking Information Certain information included in this MD&A contains forward‐looking statements within the meaning of applicable securities legislation, including statements with respect to management’s beliefs, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward‐looking statements generally can be identified by the use of forward‐looking terminology such as “outlook”, “objective”, “may”, “will”, “expect”, “intent”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue” or similar expressions suggesting future outcomes or events. Such forward‐looking statements reflect management’s current beliefs and are based on information currently available to management. These statements are not guarantees of future performance and are based on our estimates and assumptions, which are subject to risks and uncertainties, and could cause our actual results to differ materially from the forward‐looking statements contained in this MD&A. These risks and uncertainties include, among other things, risks associated with mortgage lending, competition for mortgage lending, real estate values, interest rate fluctuations, environmental matters and the general economic environment. We caution that the foregoing list is not exhaustive, as other factors could adversely affect our results, performance or achievements. Readers are also cautioned against undue reliance on any forward‐looking statements. Although the forward‐looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward‐looking statements. Except as required by applicable law, we undertake no obligation to publicly update or revise any forward‐looking statement, whether as a result of new information, future events or otherwise.

Background and Overview Builders Capital is a mortgage lender providing short‐term course of construction financing, primarily to residential builders. The company was formed on March 28, 2013 and commenced active operations on December 12, 2013 on the closing of our initial public offering and our listing on the TSX Venture Exchange under the symbol BCF. The company is a mortgage investment corporation (MIC) within the meaning of Section 130.2(6) of the Income Tax Act (Canada) and is governed by the laws of the Province of Alberta. As an MIC, Builders Capital is not subject to income tax provided that we distribute all of our taxable income as dividends to shareholders within 90 days of our December 31st year‐end. For income tax purposes, such dividends are treated by shareholders as interest income, so that each shareholder is in the same tax position as if their proportionate share of mortgage investments made by the company had been made directly by the shareholder.


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The company is structured with two classes of shares: Class A Non‐Voting Shares, held by the public, and Class B Non‐Voting Shares, held by management and private investors. This two‐tier share structure grants dividend priority to the Class A Non‐Voting Shares, providing additional security of both principal and dividends to our public shareholders, as detailed under the section entitled Distributions later in this MD&A. In addition to the Non‐Voting Shares, Builders Capital has a limited number of Voting Shares, which are held by the company’s principal shareholders.

Investment Strategy In order to deliver above average risk‐weighted returns, our strategy is to invest primarily in short‐term construction mortgages that are secured by development stage residential real property. Lending on development property is limited, with mortgages generally provided only in circumstances where a borrower intends to complete the development and build on the land. Investments in our portfolio are strategically concentrated on:

First or subordinate mortgages on real estate with a target of up to 75% of property value;

Mortgages on residential wood frame construction projects; and

Mortgages on properties located in typically more liquid and less volatile urban markets and their surrounding areas, with a geographic focus on Western Canada.

Investment Restrictions Our share terms provide for a number of investment restrictions that can only be changed by a vote of all of the shareholders:

Builders Capital will not make any investment or conduct any activity that would result in the company failing to qualify as a “mortgage investment corporation” within the meaning of the Tax Act.

We will not invest in asset‐backed commercial paper or in securitized pools of mortgage loans, including securitized pools of sub‐prime mortgages.

We will not invest in securities other than first and subordinate mortgages secured by real property and, on a temporary basis only, interim investments consisting of cash and cash equivalents, Government of Canada treasury bills and Government of Canada bonds with a term to maturity of three years or less (although the company shall not be precluded from owning securities of our subsidiaries or affiliates).

Builders Capital will not engage in securities lending.

The company will not engage in derivative transactions for speculative purposes and will only take part in derivative transactions in order to hedge interest rate or exchange rate risk.

Operations Builders Capital provides short‐term, course of construction financing to builders of residential, wood‐frame construction projects in Western Canada. We believe that staying focused on this niche market reduces overall risk and increases the potential return on our mortgage portfolio. All of our mortgages are tailored to the specific needs of residential builders, giving Builders Capital a competitive advantage in this sector of the construction market.


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Our mortgage portfolio and operations are managed by Builders Capital Management Corp. (the manager) under a management agreement. The manager sources and services mortgage loans and directs the company’s business operations. Under the terms of the management agreement, the manager provides staff, office space and equipment, as well as the expertise required to operate the business of the company. The manager maintains extensive experience in all aspects of residential construction and in‐depth, up‐to‐date residential real estate industry knowledge in order to make prudent mortgage underwriting decisions and efficiently manage potential mortgage defaults. The manager has the ability to complete any unfinished development projects that Builders Capital may acquire through enforcement proceedings or otherwise in a timely and cost‐effective manner. All such actions are conducted by the manager on behalf of the company. All investments are subject to a rigorous underwriting review. When sourcing investment opportunities, the manager will conduct an initial review to confirm that a mortgage prospect satisfies our lending criteria and Asset Allocation Model (AAM). The AAM dictates the allocation of the aggregate funded and committed assets, based on geographical, economic sector, term, borrower and loan‐to‐appraised value criteria. The manager is then required to perform comprehensive due diligence of the underlying assets. The due diligence process revolves around the manager’s system of underwriting loans and evaluating projects and borrowers. This process includes a detailed re‐costing of each project based on the assumption that we are going to build it ourselves and an analysis of what the completed project will be worth. This assessment gives us the information we need to ascertain the value proposition inherent in the project. We only loan on projects that we believe are economically sound and for which we have the capability, through the manager, to complete and sell if necessary. All of the loans we make to borrowers consist of promissory notes secured by collateral mortgages over real property. None of the mortgages are originally written for terms longer than one year. Subject to the satisfaction of Builders Capital’s rigorous lending requirements, any or all of our mortgages may be, or may become, revolving in nature. In some cases, the mortgage is intended to be repaid on or before the end of its original one‐year term, which would typically coincide with the building project being completed and sold. In cases where the project has not been completed and/or sold by the end of the term, assuming that the manager is comfortable with the marketing efforts and security position, we will generally renew the mortgage to give additional time for completion and marketing. In these cases, no cash is usually received on the renewal, although we will sometimes require a payment or additional security on the loan. In other cases, the intention is to continue financing the ongoing construction of projects for a borrower on a revolving basis. In these situations, each time a project is completed and sold, cash is received to pay down the loan balance, in some cases to zero. As the loan balance is reduced, new projects can be added to the mortgage. At term‐end, as builders will generally have a number of projects under construction at varying stages of completion, the mortgages are typically renewed and the builder draws down on the renewed mortgage to continue to fund their projects. In these cases, there is a revolving aspect to the loan but, again, no cash is expressly due upon the renewal. Payments of principal, interest and fees are generally only required on the sale or refinancing of the property forming the security for our loan. However, our loan terms stipulate that we can expect


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payments after substantial completion of a project. Further, all of our mortgages are demand loans, which can be called at our discretion. While our mortgages often revolve, and can continue to be renewed for multiple years, our goal is to keep the terms short on any one project and to have borrowers repay advances against each project on its completion, either through the sale of the property or by refinancing with another institution. At inception, we target a loan‐to‐value ratio not exceeding 75%. However, calculating a loan‐to‐value ratio requires estimates of value, which are subject to uncertainty. For various reasons, including accruing interest, delays in completion of projects and changing market values, this target ratio is sometimes exceeded. We generally become concerned about collectability when any loan exceeds an estimated 85% loan to value ratio.

Q3 2019 Summary Performance Highlights

Consistent with our targeted distribution, dividends paid to Class A public shareholders in the

first quarter were $0.2016 per share, representing an 8% annual return on the original $10.00

issue price.

At quarter‐end, our debt‐to‐equity ratio was an extremely conservative 2.3%.

Assets held for sale were reduced by $527 thousand during the third quarter, and a further $287

thousand subsequent to the quarter‐end.

Business Environment

Conditions in our core western Canadian markets are expected to remain weak through the

balance of 2019, but are forecast to improve over the next two years.

In Calgary, CMHC predicts: “Supported by strong population growth, the pace of new home

construction is projected to gain traction in 2020 and 2021,” and employment and population

growth are expected to support sales activity going forward.

In Vancouver, CMHC predicts: “housing starts over the next two years are expected to maintain

a level of activity above the 10‐year average.”

We believe margins on new construction continue to be viable, benefitting from relatively low

raw land and sub trade costs in the Alberta market.

Overall, we believe housing starts in our western Canadian markets will be adequate to support

the long‐term growth and continued geographic diversification of our business.


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Financial Overview

Three months ended

September 30, 2019

$

Three months ended

September 30, 2018

$

Three months ended

September 30, 2017

$

Revenues 648,104 870,441 854,603 Total comprehensive income 261,441 563,880 595,960

Total assets 27,660,737 29,898,420 30,005,779

Shareholders’ equity 27,028,481 26,768,731 25,296,956

Basic and diluted earnings per share 0.09 0.20 0.23

Cash dividends declared 491,261 542,343 565,362

Cash dividends declared per Class A share 0.2016 0.2016 0.2016

Cash dividends declared per Class B share 0.0997 0.189 0.2057


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Investment Portfolio At September 30, 2019

Property Type

Mortgage Portfolio

(No.)

Outstanding Balance

($) Total Committed

Mortgage Principal

($)

%

AAM Allocation*

Residential

Single family – Detached 17 11,629,253 18,650,000 51% 100%Single family – Attached 9 11,274,217 11,830,550 49% 100%

Total: 26 22,903,470 30,480,550 100% N/A

Geographic Location of Property

Calgary and Area 15 17,259,661 20,680,550 75% 100%

Edmonton and Area 2 1,283,876 2,550,000 6% 100%

Other Alberta 4 1,264,425 2,135,000 6% 100%

British Columbia 5 3,095,508 5,115,000 13% 50%

Total: 26 22,903,470 30,480,550 100% N/A

Interest Rate (excluding fees)

Less than 10% 1 1,963,831 1,950,000 9% N/A

10%-10.99% 10 10,759,201 14,410,550 47% N/A

11%-11.99% 6 5,120,734 5,525,000 22% N/A

12%-12.99% 7 3,619,614 6,795,000 16% N/A

Greater than 13% 2 1,440,090 1,800,000 6% N/A

Total: 26 22,903,470 30,480,550 100% N/A

Original Funding Date **

Calendar 2019 9 8,146,773 10,095,000 36% N/A

Calendar 2018 6 4,835,534 4,890,550 21% N/A

Calendar 2017 3 2,341,839 4,100,000 10% N/A

Calendar 2016 2 723,233 3,350,000 3% N/A

Calendar 2015 2 1,116,263 1,550,000 5% N/A

Calendar 2014 or earlier 4 5,739,828 6,495,000 25% N/A

Total: 26 22,903,470 30,480,550 100% N/A

*Indicates the maximum percentage of the portfolio allowable under Builders Capital’s Asset Allocation Model. **Loans are originally written for terms of up to one year, but are renewed in cases where a builder continues to roll new security onto the loan facility or if the project has not been sold but is still progressing or being actively marketed.


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Introduction Real estate markets in the regions in which we operate have suffered a sustained downturn in recent years, with substantial declines in home selling prices and sales volumes, as well as increased marketing times. While our core markets are now beginning to stabilize, the lengthy downturn has impacted the short‐term construction lending market that we specialize in, with lingering effects on our business and results. When real estate markets decline, the value of the project declines against a fixed level of borrower investment, which drives up our loan‐to‐value ratios and often, our default rates. Through the downturn in our markets, we have been dealing with loans that were originally underwritten under more favourable market conditions, but for which completed properties are being sold into a substantially less robust marketplace. We are now optimistic that this trend is nearing an end as most of our loans have been turned over such that our assessments of the underlying security have been performed based on more current, lower valuations. This is reflected in the fact that the weighted average loan to value ratio on our portfolio has returned to our target level of 75% (down from a peak of 82% in December of 2017). That said, our remaining older mortgages continue to carry risk. In the nine months ended September 30, 2019, in addition to a heightened number of foreclosures, we have experienced shortfall situations in which a mortgaged property sells, but the proceeds are insufficient to fully repay the loan balance and all accrued interest. In these instances, we pursue the borrowers on their personal guarantees, however the value of a personal guarantee is substantially lower than that of real estate security and can be difficult to collect on. Accordingly, in our financial statements, we do not ascribe a value to loan balances that are secured only by personal guarantees. In the third quarter, we allowed for a substantially higher‐than‐usual provision for mortgage loans due primarily to two such loans. Weak market conditions have also hampered our ability to predict when existing loans will payout and when that capital can be redeployed into new lending, leading to lower levels of capital utilization in the first nine months of 2019. Our first priority has been to preserve the capital with which we have been entrusted and we have focused on effectively managing problem loans and foreclosures to reduce our risk. We have also underwritten new loans more conservatively than we would in healthier markets. While this tight management has helped to lower risk and maintain the strength of our portfolio, it has put downward pressure on our financial results. On a positive note, we continue to reduce our portfolio of foreclosed properties, having sold four properties for $3.2 million over the past three quarters. We expect to reduce this portfolio by another $575 thousand following the closing of additional sales in the fourth quarter. We also now believe the timing is right to pursue more builders’ loans and to work towards fuller utilization of our capital and increased use of our line of credit. Market forecasters are predicting a recovery in our core markets over the next two years. We have also seen our borrowers sell, or enter into agreements to sell, a number of properties in recent months and can see the velocity of the turn‐over in our portfolio starting to improve. While we will continue to be conservative in our underwriting, we intend to increase capital utilization going forward and anticipate a corresponding strengthening of our financial results.


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Operating Results for the Three and Nine Months Ended September 30, 2019 Our mortgage portfolio as at September 30, 2019 was 18.6% lower than a year ago, reflecting our increased inventory balance as a result of foreclosures, as well as our cautious approach to new loans through the recent market uncertainty. During the nine months ended September 30, 2019, we carried out three foreclosures, comprising nine properties and representing $6.0 million of our $27 million mortgage portfolio. These foreclosures were anticipated and allowances were made for them in our fiscal 2018 financial statements. Of the nine foreclosed properties, six have since sold, one subsequent to the end of the third quarter. A seventh property is currently under a conditional contract for sale. Of the remaining two units, one is a free‐standing house in Edmonton, Alberta which is approximately 65% complete and on which completion work is underway. The remaining property is an individual unit in a townhouse complex with construction currently 98% complete. Cash advances and invoiced interest totaled $5.2 million in the third quarter of 2019, as compared to $3.9 million in the second quarter of 2019, and $6.6 million in the third quarter of last year. For the first nine months of 2019, total cash advances and invoiced interest totaled $13.7 million, as compared to $19.5 million in the same period last year. These results reflect weak market conditions and the resulting slow turn‐over of our loans, as well as our more conservative lending policies during the market downturn. The Q3 2019 advances were offset by $6.9 million in mortgage repayments. Based on an average of incoming and outgoing cash, we turned over 22.6% of our weighted average net invested capital during the quarter, representing an annualized turn‐over of 89.6% of capital. As market conditions improve, we expect to complete the liquidation of our property inventory positions and source additional profitable loans in order to move closer to our targeted capital turnover rate of 100% of capital every nine months. Achieving this target will require turning over approximately 33% of our capital each quarter. In tandem with underwriting mortgages, we regularly engage in the purchase and sale of mortgages to help ensure full cash utilization and create liquidity as required. During the first three quarters of 2019, we purchased $1.9 million in mortgages, and sold none. This contrasts to the first three quarters of 2018 when we bought $4.9 million of mortgages and sold $698 thousand. All of the purchase and sales transactions were conducted with Builders Capital (2014) Ltd., a privately held corporation owned by certain directors of the company. We lowered our loan‐to‐value ratio (“LTV”) approximately to our target of 75% in the first three quarters of 2019, which compares favourably to our weighted average LTV of 79.1% at the end of fiscal 2018 and 78.2% at the end of Q3 2018. Further reducing shareholder risk is our minimal use of leverage. Generally, the only debt that we employ is our line of credit, which is used primarily as a cash flow tool to facilitate making advances to borrowers. In the final quarter of 2017 we borrowed an additional $1.3 million, secured by our assets held for sale, to mitigate the impact of unproductive assets. We repaid one half of this loan in August of


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2018 and the balance during the second quarter of 2019 as funds became available. As difficult market conditions persisted, we remained cautious in our lending and worked to reduce our line of credit balance. Accordingly, our debt‐to‐equity ratio stood at 2.3% at the end of Q3 2019, down from 21.5% at the end of Q3 2018. Going forward, our confidence in our markets has improved and we plan to utilize our line of credit to fund additional mortgage loans and improve returns. As at the end of the third quarter of 2019, the total value of our mortgage portfolio, before taking into account our $285,000 allowance for mortgage losses, was $22.9 million. This compares to $27.7 million at the end of fiscal 2018. The $4.8 million, or 17.3%, decrease was largely the result of Q1 2019 foreclosures, which had the effect of reallocating $4.9 million in capital from mortgage assets to inventory assets. We expect to be able to re‐deploy these assets into productive loans in the near future. As at September 30, 2019, our loan portfolio was made up of 26 mortgages with an average outstanding balance of $881,000. Revenue For the three months ended September 30, 2019, mortgage revenue decreased 25.5% to $648,000, from $870,000 in the same period last year, primarily reflecting the smaller mortgage portfolio. For the nine months ended September 30, 2019, revenue of $2.19 million was down 13.9% from $2.55 million in the first three quarters of 2018. At September 30, 2019, the weighted average interest rate on our mortgages was 11.31%, down slightly from 11.65% at September 30, 2018. This change reflects our continuing focus on building a higher‐quality, lower‐risk mortgage portfolio. Our goal now is to maintain our interest rates around this level. Third quarter 2019 revenue consisted of $598,000 in interest and $50,000 in lender fees charged to borrowers, equating to annualized gross revenue of 8.9% of the weighted average gross share capital. This compares to 12.3% for Q3 2018. The nine‐month revenue was comprised of $2.0 million in interest and $162,000 in lender fees, representing annualized gross revenue of 10.2% of the weighted average gross share capital, as compared to 12.4% in 2018. Lender fees are tied to the negotiation of new mortgages, generally at 1% of the approved loan amount, and are charged for an annual term to borrowers when new loans are made or existing loans are renewed. Lender fees are maximized when turnover in the portfolio is highest. Lender fees in the third quarter decreased by 29% compared to Q3 2018, while year‐to‐date lender fees were down by 10.5% as compared to the same period in 2018. Lender fees in the quarter were 31.6% lower than management fee expense. Expenses Excluding funds set aside to provide for loan losses and interest expense, third quarter operating expenses increased by $2,000 year‐over‐year to $102,000. This represents 15.7% of revenue as compared to 11.5% last year. Our goal is to keep operating expenses within 10% of revenues and we will continue to closely monitor our expenses as we work toward this target. Most of our expenses are reasonably fixed and increasing revenues by deploying additional capital will be key to getting back below the 10% mark. This quarter, our provision for mortgage losses was $284,000 which is significantly higher than the $108,000 we have averaged per quarter since inception. We believe we are nearing the end of an


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extended period of heightened mortgage write‐downs, but will continue to take allowances that we deem are required to offset potential mortgage losses. Management fees were $73,000 in the third quarter and were calculated on the total gross amount of Class A and Class B Non‐Voting Shares outstanding. As we continue to grow our capital base, these fees will continue to increase, but our expectation is that they will be more than offset by increasing revenues. Interest expense applies to our operating line of credit, which we use as a cash flow tool to fund mortgage draws. Interest expense also applies to the loan drawn in the fourth quarter of 2017, which was secured by assets held for sale and which has now been repaid. A higher utilization rate for our capital will provide better returns in the form of additional interest income, but will also necessitate increased use of our line of credit for funding draws when our own funds are fully employed. As at September 30, 2019, our line of credit was unused, as compared to a balance of $1.4 million at the end of 2018. No interest expense was incurred in the quarter. Total Comprehensive Income We generated earnings per share of $0.09 in the third quarter of 2019, as compared to $0.20 in the same period last year. Total comprehensive income was $261,000, down 54% from $564,000 in the third quarter of 2018. Year‐to‐date comprehensive income was down 19% to $1,320,000, from $1,632,000 in the first three quarters of 2018. These results are below our historical levels and reflect the negative impact of foreclosures, conservative lending and generally poor market conditions. We note that the historically lower total comprehensive income results have not affected dividends paid to our Class A Non‐Voting shareholders. Our share terms call for annual dividends of $0.80 per Class A Non‐Voting Share per year, or approximately $0.20 per quarter, prior to any other dividends being paid. Year‐to‐date earnings were $0.46 per share overall, but were $0.67 per Class A Non‐Voting Share. These earnings exceeded the amount required to satisfy the 8% ($0.20 per share per quarter) dividend committed to the Class A Non‐Voting shareholders. With Class B Non‐Voting shareholders bearing a much greater proportion of the risk of income fluctuations, we anticipate that potential continued fluctuations in our comprehensive income will not affect the payment of our Class A Non‐Voting Share dividends. In order to maintain distributions on the Class B Non‐Voting Shares, we have been actively working to raise capital from the sale of additional Class A Non‐Voting Shares. Increasing the number of Class A Non‐Voting Shares in relation to the Class B Non‐Voting Shares will improve the Class B Non‐Voting share returns in any period during which our net earnings exceed an 8% overall return on capital. On March 31, 2019, we issued 30,000 Class A Non‐Voting Shares and on April 9, 2019 we issued an additional 75,000, all for $10.00 per share. Our ratio of Class A to Class B Non‐Voting shares now stands at 2.1:1, up from 1.4:1 after our initial public offering. Our share terms limit the ratio to no greater than 3:1. Share Issuance Costs Year‐to‐date share issue costs relating to the additional capital raised were $28,000. Total share issue costs since inception now stand at $2.4 million, including professional fees for offering document preparation; offering, agent and brokerage fees and commissions; and other marketing and offering costs. In accordance with IFRS, these share issue costs are accounted for as a reduction in the value of


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the equity of the company. These costs are, however, deductible for tax purposes over a five‐year amortization period. Our intent is to restrict shareholder distributions to less than 100% of net income in order to utilize the tax deductibility of these payments. This distribution policy will, over time, have the result of retaining income equal to the offering costs within Builders Capital, which will increase the Net Asset Value of the company while ensuring that no corporate taxes are paid. Because of the two‐tier share structure, and the priority on distributions that the Class A Non‐Voting Shares hold over the Class B Non‐Voting Shares, we expect the restriction in distributions to come primarily from the portion of income otherwise available for distribution to the Class B Non‐Voting shareholders. Statement of Financial Position At September 30, 2019 total assets were $27.7 million (Q3 2018 – $29.9 million), $4.0 million (14.5%) of which was tied up in assets held for sale. The balance is primarily funded mortgages. The $2.2 million change in total assets since September 30, 2018 is primarily the result of funds received on the pay‐down of mortgages being utilized to pay off debt. At September 30, 2019 assets held for sale included one building lot in Richmond, British Columbia and one completed home in Saskatoon, Saskatchewan, both of which are currently listed for sale. Assets held for sale also included one under construction single family home in Edmonton, Alberta, which is currently being completed, and three townhouse units in Calgary, Alberta of which one has since been sold, one is under a contract for sale closing in December, and one is listed for sale. All of the properties held for sale are being carried at their estimated fair market value. Liabilities at September 30, 2019 totaled $0.6 million (September 30, 2018 – $3.1 million) and were comprised of: dividends relating to the fiscal quarter paid on October 31, 2019; our trade payables; the balance due to Builders Capital Management Corp. and deferred lender fees.

The company was in compliance with all bank covenants relating to the line of credit and the loan

payable and had no off‐balance sheet arrangements during the year.

Quarterly Financial Information

Quarter ended September 30

2019 $

Quarter ended

June 30 2019

$

Quarter ended

March 31 2019

$

Quarter ended

December 31 2018

$

Quarter ended September 30

2018 $

Quarter ended

June 30 2018

$

Quarter ended

March 31 2018

$

Quarter ended

December 31 2017

$

Revenues 648,104 698,111 845,714 884,185 870,441 845,660 828,979 842,234 Total comprehensive earnings 261,441 472,190 593,228 292,116 563,880 492,823 575,892 533,613

Total assets 27,660,737 27,789,720 30,146,336 28,918,136 29,898,420 33,234,463 30,060,233 31,418,419

Shareholders’ equity 27,028,481 27,258,301 26,653,051 26,250,889 26,768,731 26,522,452 25,679,439 25,683,552

Earnings per share 0.09 0.16 0.21 0.10 0.20 0.18 0.21 0.20 Cash dividends declared 491,261 588,715 491,066 552,658 493,450 542,343 583,522 545,664

Cash dividends declared per Class A share 0.2016 0.1995 0.1973 0.2016 0.2016 0.1995 0.1973 0.2016

Cash dividends declared per Class B share

0.0997 0.2096 0.1247 0.1890 0.1247 0.1763 0.1763 0.2521


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Distributions Under our two‐tiered share structure, Class A Non‐Voting shareholders are entitled to receive annual dividends of 8% in preference to all other shareholder distributions. Once these dividends have been paid, Class B Non‐Voting shareholders are entitled to receive total annual dividends of up to 16%. At our fiscal year‐end, any remaining income available for distribution after these dividends are paid is allocated pro‐rata between the classes of shares, including the Voting Shares. On September 20, 2019, based on income for the third quarter of 2019, our Board of Directors declared a dividend of $0.2016 per Class A Non‐Voting Share to shareholders of record on September 30, 2019. This distribution was paid on October 31, 2019 and is recorded as payable in the accompanying consolidated financial statements. The dividend amount was calculated to provide an annualized 8% return on the $10.00 initial Class A Non‐Voting Share price. Subsequent to the quarter‐end, on October 29, 2019, again based on results for the third quarter of 2019, the Board declared a dividend of $0.1008 per share to Class B Non‐Voting shareholders of record on that date. This distribution was also paid on October 31, 2019. This dividend is not recorded in these consolidated financial statements as it was declared subsequent to the quarter‐end.

Liquidity and Capital Resources Cash flow and liquidity are critical to our success. We monitor both daily to ensure we can meet the expectations of our borrowers. In the second and third quarter of 2019, the real estate market in Calgary began to show signs of improvement and a number of our borrowers who had been having difficulties selling completed properties were able to sell and pay down their mortgages. Combined with a relatively slow pace of new mortgage origination, this resulted in strong liquidity in the quarter and we ended the quarter with $1.0 million in surplus cash available. Subsequent to the quarter, we have been sourcing additional mortgages and currently have no surplus cash and are utilizing our line of credit. During the three months ended September 30, 2019, mortgages were funded in the amount of $5.2 million, bringing the year‐to‐date total to $13.7 million. Third quarter repayments amounted to $6.9 million, for a year‐to‐date total of $16.7 million. In addition, we received $1.3 million on the sale of foreclosed inventory. As our mortgages are predominantly short‐term in nature, the continual repayment by borrowers of existing mortgage investments creates liquidity for ongoing mortgage investments and funding commitments. Our mortgage portfolio turns over approximately annually. We expect that borrower repayments will remain at a reasonably consistent level through the balance of 2019 and plan to continue funding mortgages in amounts approximately equal to mortgage repayments received. It is likely that a number of our mortgages will be renewed as they come due, as discussed earlier under Operations. Liquidity risk for the company arises primarily from the prospect of committing to a mortgage for which sufficient funds are not available to make draws as requested by the borrower. As noted in the table titled Investment Portfolio above, we have mortgage commitments to borrowers totaling $30 million, which exceed the current amounts funded by $7.5 million. We anticipate funding these commitments through the repayment of existing mortgages. Should mortgage repayments fall short of our


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commitments, we have a number of tools to manage liquidity and to ensure that commitments can be met. Included are our $4.5 million line of credit, detailed cash flow planning procedures, and Builders Capital’s well‐established network of affiliates and mortgage industry contacts, through which mortgages can be sold or syndicated as required for cash flow purposes. In addition, our mortgage documents include language whereby a borrower cannot compel the company to advance funds. Our primary goal is to minimize unused cash balances, while ensuring that borrower needs and other commitments can always be met. Since inception, almost all of the sales and purchases of mortgages, which have both helped keep the mortgage book full and been a source of liquidity as required, have been to and from related parties, in particular Builders Capital (2014) Ltd. (“BCL”). BCL is a privately held corporation, of which Builders Capital directors Sandy Loutitt and John Strangway are also both directors. The company has often been reliant on BCL as a vendor and purchaser of mortgages and as a source for liquidity, including at certain times of low cash flow, for payment of dividends. This reliance means that if BCL was unwilling or unable to act as a purchaser or vendor of mortgages, the company would have to leave a larger margin for error in our cash management practices, which could reduce profitability. The company expects to continue to be able to rely on BCL as a source of liquidity in the future. It is unlikely we could find another party that could provide liquidity as quickly or as efficiently. We are prepared to increase our issued capital and regularly make solicitations for investments in Class A Common non‐voting shares. Should such shares be issued, the proceeds will be used for general cash flow and for expansion of our mortgage portfolio. Builders Capital is financed, and will continue to be financed, primarily by the issuance of common shares. According to our share terms, Class A Non‐voting shareholders have an annual right to redeem their shares on October 31 each year at 95% of Net Asset Value. Payment for the redemptions is to be made on November 30 each year. During October of 2019 we received redemption requests for 11,500 shares, which will be redeemed on November 30, 2019 for $102,580.

Related‐Party Transactions Our manager is a company controlled by Sandy Loutitt and John Strangway, both of whom are also directors of Builders Capital. The manager receives a management fee calculated as 1% per annum of the book value of the share capital of the company. Management fees amounted to $73,000 for the quarter (2018 ‐ $71,000) and $214,000 for the nine‐month period (2018 ‐ $205,000). In addition to the management fee, the manager charges lender fees directly to borrowers both on loan originations and on loan renewals, with 28.6% of these fees being paid to the company and the remaining 71.4% going to the manager. The company collects these fees from the borrower, both on our own behalf and on behalf of the manager, by adding them to the principal amount of the mortgage, generally on the first advance to the borrower. The company then pays the manager’s share of the fees to the manager, regardless of whether or not any payments have been received on the mortgage. Such payments to the manager are generally made within 30 days of having been charged to the borrower. Renewal fees are also charged to the borrower and paid to the manager during the term of the mortgage. During the quarter, the amount of these fees collected on behalf of the manager totaled $127,000 (2018 – $77,000) and $344,000 for the nine month period (2018 ‐ $382,000).


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In general, mortgages are purchased when the company has excess cash on hand, quality mortgages are available to purchase, and opportunities to immediately fund additional mortgages are not available. The acquisition of mortgages helps us to minimize excess balances and maximize interest revenue. Mortgages are sold when, despite the line of credit being fully drawn, additional cash is required, or is forecast to be required, to fund mortgage draws and commitments. Often, mortgages purchased are subsequently sold back and vice versa. The purchase and sale of mortgages sometimes results in balances due to or from related parties being outstanding for short periods of time. These balances are unsecured and non‐interest bearing. No mortgages were purchased or sold in either Q1 or Q2 and $1.9 million in mortgages were purchased in Q3. Market Outlook The following discussion is qualified in its entirety by the Notice Regarding Forward‐Looking Information at the beginning of this MD&A and by the section entitled Risks and Uncertainties that follows this Outlook section. While Canadian housing starts and average house prices are expected to register a second consecutive year of decline in 2019, the Canada Mortgage and Housing Corporation’s (CMHC) most recent Housing Market Outlook (published October 24, 2019) anticipates improvement in sales and prices over the next two years, supported by income and population growth. In our primary Calgary market, CHMC forecasts that strong population growth and a decrease in unsold homes inventory will result in new home construction gaining traction in 2020 and 2021, following a slight decline in activity in 2019. In British Columbia, CMCH predicts sales and prices will begin to stabilize in 2020 and accelerate in 2021. While the recovery in price growth is expected to be modest in 2020, CMCH expects the BC market to achieve the second‐ highest rate of price growth after Ontario in 2021. CMHC also predicts improvement in the Saskatchewan housing market over the next two years, but at more modest levels than BC and Alberta due to weaker employment and population growth. Accordingly, we will continue to concentrate on our core Alberta and BC markets where we anticipate opportunities to source quality projects with good builders will gradually improve. Going forward we expect to further reduce our portfolio of foreclosed properties. Over the past 18 months, we have foreclosed on 12 properties and sold or conditionally sold 10 of them. We have also reduced the weighted average loan‐to‐value ratio on our portfolio to approximately 75% and believe that there is sufficient equity in the majority of the loans in our portfolio to minimize the risk of further loan losses. As always, however, it remains possible that we will need to take additional steps to collect on some of our mortgage assets over the coming months. That said, we believe that the necessary safeguards are in place to assure our ability to maintain the Class A Non‐Voting Share dividend at 8% per annum. These safeguards include maintaining a prudent debt‐to‐equity ratio, generally restricting our lending to 75% of what we believe to be the fair market value of a property at any given time, and taking adequate allowances for expected credit losses allowing us to build a cushion of funds to further protect investors. In addition, by investing only in short‐term mortgages, we maintain the liquidity necessary to preserve capital. In the event that we believe a market has become too risky, we will work on converting our


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investments to cash, and will forego returns in order to protect the capital with which we’ve been entrusted. Finally, safeguards built into our share structure give Builders Capital’s public Class A Non‐Voting shareholders priority on all capital and income distributions over our Class B Non‐Voting shareholders. In the event of a serious decline in the earning potential or value of our portfolio, Class B shareholders would forego all distributions until the Class A shareholders have received both their 8% return and, in the case of a dissolution, their capital. As demonstrated during recent quarters, with the impact of both our increased allocation of funds against potential loan losses and unproductive assets, borne entirely by Class B Non‐Voting shareholders, this structure is functioning as intended. Going forward, we will focus on more fully utilizing our capital and growing our business. Given the size of the marketplace, our current relatively small market share, and the opportunities that exist to expand our geographic footprint, we are well positioned to continue sourcing high‐quality lending opportunities.

Financial Instruments Our primary business purpose is to invest in mortgages which accordingly are the only significant financial instrument that we carry and are the source of virtually all of our revenues. These financial instruments expose us to risks which are managed as follows:

Credit Risk

Credit risk is the risk of loss associated with the counterparty's inability to fulfill its payment obligations. Credit risk arises principally from our lending activities. Any instability in the real estate sector and an adverse change in economic conditions in Canada could result in declines in the value of real property securing our mortgages. We mitigate this risk by adhering to our investment and operating policies.

All mortgages to which we commit are individually evaluated by our underwriters using credit risk assessment tools and are assigned risk ratings in accordance with the level of credit risk attributed to each loan. Each new mortgage is approved independently and in accordance with the authorization structure set out in our policies. Our underwriting approach places a strong emphasis on the value of the mortgage security and an assessment of the financial viability of the construction project being financed.

We have clearly defined underwriting policies and procedures that we adhere to in our mortgage approval process. These include a maximum projected loan‐to‐value ratio, standards with regard to the asset quality and marketability, geographic market restrictions and requirements regarding the overall credit quality and integrity of borrowers. We also actively analyze external market conditions including prevailing real estate values and employment conditions in the markets in which we lend. In all cases, our mortgages receivable are secured by registered charges over real property.

We utilize an internal risk rating system to categorize each mortgage in the portfolio on the basis of the perceived risk of a potential credit loss. The risk assessment of each mortgage assigned at the underwriting stage is subsequently revised based on changes in market conditions and on factors specific to the mortgage and the borrower. One of the main factors in considering whether the credit risk of a mortgage has increased significantly is the estimated loan‐to‐value ratio. Loan‐to‐value ratios can change due to declining property values, as well as other factors such as the inability of the


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borrower to continue to inject equity into the project. Mortgages are considered to be impaired when the expectation is that full collection of principal and interest is no longer likely.

Our lending is for construction purposes, and all loans are made only on the strength of mortgage security over real property. The value of the underlying security is subject to change for a variety of factors, including the degree of completion of the construction, possible deterioration in structures left incomplete and market forces which can cause values to either increase or decrease.

In the case of mortgage impairment, probable recovery is determined using a combination of updated property‐specific information, historical loss experience and management judgement to determine the impairment provision that may be required. The primary factor in assessing a mortgage as low risk would be a loan to value ratio which is low enough to make a potential credit loss extremely unlikely.

Although we write mortgages for periods of one year or less, the mortgages are often renewed based either on the borrower’s ongoing requirement for capital for additional projects, or because the project which was originally financed has not been completed and sold. In each case, prior to renewal, we assess the mortgage for impairment.

Mortgages which were funded prior to the end of the previous fiscal year, and which have been renewed due to delays in completing the construction or the sale of the underlying security rather than due to a revolving arrangement for ongoing construction having been made, and for which no specific allowance has been recognized, can be considered to be past due, but not impaired as management considers collection to be reasonably assured due largely to the estimated value of the mortgage security held.

Market Risk

Market risk is the risk of loss that may arise from changes in market factors such as interest rates and foreign exchange rates.

i) Interest Rate Risk

Interest rate risk arises from the possibility that the value of, or cash flows related to, a financial instrument will vary as a result of changes in market interest rates. We manage our financial instruments with the objective of mitigating any potential interest rate risks. The interest rates on the company’s mortgages receivable are fixed for the term. Therefore, we are not exposed to significant cash flow interest rate risk. As at September 30, 2019, our mortgages receivable are subject to fair value interest rate risk as a decrease or increase in market interest rates will decrease or increase the fair value of the fixed rate financial asset. Any change in market interest rates will, however, have no impact on our cash flows or comprehensive income for the year as mortgages receivable carry a fixed rate of interest.

ii) Foreign Currency Risk

We do not have assets or liabilities denominated in foreign currency.

Liquidity Risk

Liquidity risk arises from the possibility of not having sufficient ability to obtain debt financing or equity capital to fund future growth or meet our obligations as they arise and become due. Furthermore, liquidity risk also arises if we are not able to obtain financing on favorable terms. Our main liquidity requirements will arise from mortgage acquisitions, manager fees and distributions to shareholders. All of the aforementioned liquidity requirements, except for mortgage acquisitions, are


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generally funded from cash flows earned on mortgage interest and fees. Mortgage acquisitions are generally funded through equity issuances. Our financial condition and results of operations would be adversely affected if it were unable to obtain additional funds through equity issuances or financing, or if we were unable to meet our other liquidity requirements from ongoing operating activities. Our approach to managing liquidity is to ensure that we will have sufficient financial resources available to meet our liabilities as they become due. This includes monitoring of cash, line of credit, loan payable and accounts payables and accrued liabilities. We intend to mitigate our liquidity risk by not entering into property acquisitions unless we have secured or are confident that we can secure the appropriate capital (debt and/or equity) to fund the particular acquisition. Liquidity risk is also mitigated by the terms offered to investors, which state that all redemptions are at the discretion of management and are dependent on the circumstances, and to borrowers, which state that the company is never obligated to advance additional mortgages or funding.

Responsibility of Management and the Board of Directors Management is responsible for the information disclosed in this MD&A and has in place the appropriate information systems, procedures and controls to ensure that the information used internally by management and disclosed externally is materially complete and reliable. In addition, our Board of Directors and Audit Committee provide an oversight role with respect to our public and financial disclosures. Both have reviewed and approved this MD&A and the accompanying consolidated financial statements for the quarter ended September 30, 2019.

Outstanding Share Data The company’s authorized share capital as at November 28, 2019, consists of 1,000 Voting Shares, of which 100 were outstanding at year‐end; an unlimited number of Class A Non‐Voting Shares, of which 1,979,570 are outstanding; and an unlimited number of Class B Non‐Voting Shares, of which 924,576 are outstanding.

Risk and Uncertainties There are two primary areas of risk for us as a lender. The first is the risk that borrowers will fail to meet their obligations and repay mortgages as they come due. Secondly, there is a risk that sufficient quality investment opportunities will not be available to keep our capital fully deployed. As our primary goal is the preservation of our investors’ capital, even at the expense of potential returns, we consider the risk of borrower default to be our primary concern. A robust new home construction market greatly reduces both of these risks, as it provides a strong marketplace into which builders can sell their completed projects, it maintains or increases the value of the security for our loans, and it provides an ongoing source of new projects and borrowers. A downturn in the market that substantially decreases security values could have a significant negative effect on our business. We cannot predict the performance of the housing market in the future with certainty. In order to mitigate these risks, we restrict our loan amounts to a target of up to 75% of what we consider the fair market value of the security to be. The 25% equity component is a requirement for our borrowers and we believe it provides us with a sufficient margin for error in the event of a drop in property values. The short‐term nature of our loans also gives us the flexibility to convert our entire portfolio of mortgages to cash within a reasonable time period, if economic conditions warrant. We also


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maintain sufficient construction expertise to allow us to economically complete any project on which we have loaned funds. Our share terms provide that the Class A Non‐Voting shareholders have a priority over other shareholders with respect to both the payment of dividends at an 8% rate, and any potential return of capital. This creates a significant reduction in the risk profile of the Class A Non‐Voting Shares, as an impairment in the value of the mortgage portfolio, or a lack of funds available for distributions, will always be absorbed, to the full extent of their investment, by the Class B Non‐Voting Shares before the Class A shareholders’ rights are affected. We believe that this structure substantially reduces risk for the Class A shareholder. Other risks and uncertainties exist for our business that are typical for business in general and for lenders in particular. These include changes in interest rates, potential environmental issues associated with the mortgage security, borrower solvency, any significant changes in competition, changes in tax legislation and other factors as described under Forward‐Looking Information.

Additional Information Additional information about Builders Capital is available on SEDAR at www.sedar.com and on our website at www.builderscapital.com.

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